From joint debts to family homes to hard-earned retirement savings, the range of things that a couple must figure out how to address when getting a divorce seems to have no end.
Even though a 401K account is held in one spouse’s name only, it may well be identified as a shared marital asset. When the spouse who does not own the account must provide the other person with a portion of that savings, a qualified domestic relations order may help.
What a QDRO does
A qualified domestic relations order allows money to be paid from a 401K account directly to the spouse of the person who owns the account. This occurs by establishing the non-account-owning spouse as a legal authorized payee on the account. The U.S. Department of Labor explains that a QDRO may be used for such distributions from 401K or other employer-sponsored retirement accounts.
The QDRO must detail the amount or percent of a plan’s value that shall be paid to the alternate payee, along with the dates of any payments. A property division award may include single or multiple payments. The plan administrator must review and approve the qualified domestic relations order. Payments received per a QDRO avoid the assessment of early withdrawal fees.
Tax liability with QDRO disbursements
According to the Internal Revenue Service, when the alternate payee receives funds from the 401K, they assume the income tax responsibility for the money. If that person chooses to immediately put the money into another 401K or retirement account, they may not need to pay taxes at the time they receive the money from their spouse’s 401K.